What is Core Inflation and Why Doesn’t It Include Food and Energy?

I frequently receive this question in one form or another: Why doesn’t the government consider food and energy, and just tracks core inflation?

The core inflation rate is frequently quoted in the popular press and this gives the general public the impression that the “government” doesn’t care about (or track) the rise in the prices of food and energy.

Actually this isn’t true. The core inflation rate is simply a component of the overall inflation rate. It is used by economists because often seasonal factors will skew the inflation rate.

For instance a drought might cause fruit crops to fail, causing fruit prices to rise. But this rise actually has nothing to do with inflation (i.e. price inflation caused by an increase in the money supply). It is simply a result of the forces of nature.

Another example of forces of nature causing price increases is when a hurricane causes refineries or drilling rigs to shut down. This might cause a temporary decrease in oil supply and if supplies are tight it could result in a temporary increase in oil prices.

Economists want to eliminate this volatility from their calculations and so they use the “core” inflation rate to eliminate the two most volatile components from the calculation.

And so for some reason when “cub” reporters are assigned to report on inflation they choose the “core” since it sounds cool or something and people get the idea that the government has stopped tracking the entire range of goods and is only tracking the “core” inflation rate.

But I can assure you that the Bureau of Labor Statistics is still tracking about 10,000 different items every month and it publishes this information as the CPI-U or Consumer Price Index for all Urban consumers. This is used in calculating what is commonly called the “Inflation Rate“.

This is the number that pertains more to the average consumer because it more closely resembles what you might actually spend. As you might guess since it includes 10,000 different items, some of them are food and some are energy. It also includes clothing, beverages, rent, recreation, medical care and even some strange things like bedroom furniture, college tuition, postage, telephone services, and computer software.

Obviously, you aren’t going to be buying bedroom furniture and computer software every month so your particular inflation rate will be somewhat different than the one calculated by the government but the numbers are weighted based upon how often the average consumer buys these items. So at least you can rest easy knowing that the two things that everyone needs (food and energy) has been included and is actually weighted much more heavily in the final calculation than bedroom furniture.

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Comments

This is all one big joke.
Governments do this so they can keep interest rates low, so they don’t have to pay a higher inflation wages to retirees, pensioners.
They think the people are stupid there is no inflation it’s called super hyper inflation that we have right now

Although the actual inflation rate that you see may be higher than what the government claims, it is far from hyper-inflation. During a hyperinflation you would see prices increasing at least 1% a month. Simply by looking at the price of gasoline we can see that prices are not increasing by 1% a month. According to AAA the average price of gasoline throughout the entire US in July 2015 was $2.763. So if prices increased by even 10% since last year the price of a gallon of gas would be at least $2.75 + 0.27 or $3.02 but instead gasoline was $2.22 in July 2016. This is not a sign of hyperinflation.

You obviously didn’t read the article. Core inflation is calculated without Food and energy for good reason but it isn’t because it reflects real consumer’s spending. Food and energy are volatile based on other factors other than FED money printing. The Core Inflation more accurately shows FED activity. If you are interested in what’s actually happening to Consumers look at the Consumer Price Index for all Urban Consumers (CPI-U) which DOES include Food and Energy. Or you can look at one of the other indices such as the CPI-W.

There is no good reason to exclude Food and Energy. Doing this gives an improper view of the financial reality facing the majority of Americans. The majority of the populations income is spent on Rent, Food, Energy, and Transportation. If you remove even a portion of any of the necessities than you are misrepresenting the true cost of living. If inflation was not used to determine wages and cost of living than it would not matter but it is in many cases and therefore it is essentially immoral to do so.

Actually there is a very good reason to exclude them if you are an economist. They are the two most volatile components and are often affected by temporary outside forces like weather and other government actions. If you are trying to measure the effect of monetary stimulus by the FED they can mask the effects. However, an ordinary person only concerned with the effects on your own pocket then yes that number doesn’t apply to you. So don’t worry no one uses this number to determine your Cost of Living.

I am Sorry Tim, The government only Talks about CPI to the public. They use this index to incorrectly calculate the amount it will pay to Pensioners. Its intentionally done, otherwise they would use CPI-W. Empirically stating Food has increased around 30% in the last few years. It is among the largest cost for a family. Weather is always inconstant. But Taken on a world economic scale, food is produced all over the world so that bad weather in one place does not necessarily mean anymore that there will be large scale run ups and down in food cost.

As for oil, At one point we all though that we were at point of PEAKED OIL. But someone discovered Fracking and we find oil prices settling around $50 a barrel. It is now so abundant, that it will provide stable oil price for an extended period. The USA has alone, has enough energy to supply the rest of the world until Fusion will be in full production, in 10 to 15 years. Just as our next small ice age starts.. Its only the uneducated government who have no working knowledge about about how weather form. Its only the particulates that are a problem.

In short I am saying that the points you say about stable core prices, is no longer factual as so many factors have changed to the point that they do not accurately reflect core cost. My premise is that 5 years ago you would be right, but now too things have changed significantly.

I think that you should build a new model, feed in the current information variables, and then see if those values have changed.
Our biggest economic problem is the government. Its their policy’s that change all factors.

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